When most people think about investing in multifamily real estate, such as Mid-America Apartment Communities, they think of buying a property with multiple living units and renting it out to generate income. This is certainly one way to go, but being a landlord isn’t right for everyone and it isn’t the only way.
There are three main ways to put your investment capital to work directly in multifamily real estate. In addition to buying rental properties, you could also participate in a multifamily crowdfunding investment opportunity, or you could purchase shares in a real estate investment trust (REIT).
The best option for you depends on a few different factors, including the time and capital you want to commit to the investment, your risk tolerance, how much income you expect from your investments, and more. Here’s a rundown of the three main multifamily investment options, and a list of considerations that can help you decide which is the best approach for you.
Buy a multifamily property
Buying a physical multifamily property is the most obvious way to invest in multifamily real estate. You could buy a duplex, triplex, quad, or even larger property, then rent the units to generate income. Generally, two- to four-unit multifamily properties are considered to be residential in nature for financing purposes, while those with five or more units are considered commercial real estate.
There are a few potential drawbacks to consider here. For one thing, buying a rental property is a very hands-on way to invest in multifamily real estate. Even if you hire a property manager, there’s a substantial time commitment involved.
Rental properties can also be quite inconsistent as far as income goes. Things like vacancies and maintenance costs are difficult to predict with any degree of accuracy, and expenses like property taxes and insurance can fluctuate significantly from year-to-year.
In addition, rental properties can be rather illiquid (tough to sell quickly) and generally require large initial capital commitments.
On the positive side, investing in rental properties can be a great way to generate income and build wealth over time. Nine out of 10 millionaires earned their fortunes because of real estate, so there’s clearly potential for strong returns here.
Participate in a crowdfunded real estate investment
Real estate crowdfunding is a relatively new type of investment, but it has the potential for excellent returns.
Here’s a general idea of how it works: Let’s say that an experienced real estate investor wants to buy an older apartment complex for $5 million. They want to spend $2 million fixing up the units and adding amenities, and then rent the apartments out to generate income. After a five-year holding period, the developer anticipates selling the property for $10 million.
However, they can only get a $4 million loan from the bank and have $1 million of their own capital to invest. So, in order to raise the other $2 million, the developer may choose to list the opportunity on a real estate crowdfunding platform and offer a piece of the action to individual investors.
There are several reputable crowdfunding platforms, such as Realty Mogul and CrowdStreet. Crowdfunding opportunities are added frequently, so if you’re looking to invest in multifamily real estate, this could be one way to look.
To be clear, crowdfunding is generally a high-risk type of real estate investment. The risk can be well-justified by the return potential, but it’s important to realize that because there is typically some sort of value-adding strategy (such as a renovation), there’s significant execution risk to consider.